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Disclosure out of sight

Yesterday, the New York Times reported that the SEC was considering bringing a civil action against Reed Hastings of Netflix for a Facebook posting in which company information was revealed.

Satish Dharmaraj, a partner with Redpoint Ventures, chastised the SEC for not getting social media. "The SEC is so far behind times when it comes to adopting / understanding social media," he tweeted, linking to the NY Times post.

But I think the SEC is exactly right to regard as deficient the breaking of material disclosure through Facebook.

Though many treat Facebook as a public commons, as they might a rural shopping mall, it isn't. It's a walled garden. You can't participate unless you register. Registering means exposing yourself as a target and an unpaid tool for advertising.

Dharmaraj is correct, however, if you take his tweet to speak to the larger point that the official disclosure process isn't good enough.

Right now everything disclosed by a public company - from its IPO registration statement, to its latest quarterly financials, to press releases that attach the employment offer letter for the company's new CEO - is put on a public SEC database known affectionately as EDGAR.

There's a lot about EDGAR that is pretty cool. By imposing strict standards on the form of disclosure, it becomes somewhat possible to compare apples to apples from company to company. In recent years, useful - if yet limited - full text searching features have been added. And, as just noted, everything about a public company is up there.

But you have to have the skills of a highly experienced paralegal to weed out what you want.

The most important thing to master if you're going to make EDGAR useful are the obscure codes by which all information is categorized. Do you want to look at the S-1s or the 10-Qs or the 8-Ks? And those three are easy ones. (If you happen to know the type of disclosure designated by each of those three codes, try this: What's the difference between a S-3ASR and a DEFA14A?)

(Incidently, the weight of this deficient disclosure paradigm is just one of the things that is going to crush equity crowdfunding under Title III of the JOBS Act. Now there was great opportunity to experiment with a wholly new approach to disclosure. But the regulators got at McHenry's original, bold bill, and they killed it in the US Senate.)

Right now it is legally sufficient that public information material to investors just be up there somewhere in the database. It's not particularly important that folks - other than regulators, legal types and people who work on Wall Street - be able to find the information.

The regulatory emphasis really should be on making disclosure accessible.